Having the same issue on Xcode 13.0, iOS 14.7.1 and WatchOS 7.1, also in trying to debug an iOS app (i.e. I'm not developing for WatchOS). I've restarted the computer, watch and phone, and unpaired / re-paired the phone from Xcode's devices, but can't get it to work consistently (I get stuck on "Making Apple Watch ready for development" maybe every other or every third time I try to launch the app).
Turning the watch off entirely does the trick (as I imagine airplane mode would too), but I'd like for my watch to work as well 😕